Optimal Carbon Abatement in a Stochastic Equilibrium Model with Climate Change

SAFE Working Paper No. 92

60 Pages Posted: 18 Mar 2015 Last revised: 16 Dec 2020

See all articles by Christoph Hambel

Christoph Hambel

Goethe University Frankfurt

Holger Kraft

Goethe University Frankfurt

Eduardo S. Schwartz

Simon Fraser University (SFU); University of California, Los Angeles (UCLA) - Finance Area; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: December 10, 2020

Abstract

There is much discussion in the literature about the resources society should commit to ameliorate the effects of climate change. The optimal greenhouse gas abatement strategy has a direct relation to the social cost of carbon (SCC) which measures the externalities incurred in emitting one ton of carbon dioxide into the atmosphere. This paper studies a dynamic stochastic general equilibrium model involving climate change which allows for a systematic analysis of the SCC. One special feature of the framework is that it considers feedback effects on the temperature dynamics. We compare two approaches to capture damaging effects of temperature on output (level vs. growth rate impact) and find that there are notable differences in the optimal abatement strategy and the SCC. We document that climate uncertainty delivers a major contribution to the social cost of carbon. In particular, different types of climate shocks amplify each other and give an additional boost to the social cost of carbon. We also analyze the effect of risk aversion and the elasticity of intertemporal substitution on the SCC.

Keywords: Climate change economics, carbon abatement, social cost of carbon, GDP growth, stochastic differential utility

JEL Classification: D81, Q5, Q54

Suggested Citation

Hambel, Christoph and Kraft, Holger and Schwartz, Eduardo S., Optimal Carbon Abatement in a Stochastic Equilibrium Model with Climate Change (December 10, 2020). SAFE Working Paper No. 92, Available at SSRN: https://ssrn.com/abstract=2579694 or http://dx.doi.org/10.2139/ssrn.2579694

Christoph Hambel

Goethe University Frankfurt ( email )

Faculty of Economics and Business
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Holger Kraft (Contact Author)

Goethe University Frankfurt ( email )

Faculty of Economics and Business
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Eduardo S. Schwartz

Simon Fraser University (SFU) ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-1953 (Phone)
310-206-5455 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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